Skepticism is growing that the inflation-hungry Bank of Japan can do any more to stimulate the economy now that Prime Minister Shinzo Abe has delayed the next consumption tax hike.
The BOJ could come under pressure as early as the first half to loosen monetary policy further unless wages show significant growth and inflation climbs steadily toward the BOJ’s 2 percent goal, according to sources familiar with the bank’s thinking.
The prospect of additional easing has been fueled by the recent fall in crude oil prices, which are putting deflationary pressure on consumer prices. The trend drove the central bank into a surprise decision last month to expand its radical monetary easing strategy even further.
When Gov. Haruhiko Kuroda faced the press Wednesday after the BOJ Policy Board meeting, he kept coming back to a single message: His monetary easing strategy is working as intended.
He also said a “virtuous cycle” of economic recovery is in place and emphasized that “fiscal discipline is extremely important,” hinting at discontent with Abe’s announcement Tuesday that he will delay the second consumption tax hike to 10 percent by 18 months. It had been set for next October.
Abe will dissolve the Lower House Friday for a general election on Dec. 14 as he seeks voter support to continue with his three-tiered “Abenomics” program, of which the BOJ’s “quantitative and qualitative easing,” or QQE, is but a single arrow.
The elusive third arrow has been structural reform, leaving the prospects for a sustainable recovery dependent on monetary policy alone.
Since the start of QQE in April 2013, the BOJ has been aiming to raise inflation expectations without clarifying which indicators it is watching.
QQE, which involves massive purchases of Japanese government bonds and investment trusts from banks, has suppressed yields over the entire range of sovereign debt while boosting stock prices.
More importantly, inflation is on the rise, with the core consumer price index — the BOJ’s preferred gauge, which ignores volatile prices for food but not energy — moving toward the 2 percent goal. It is natural for the market to suspect that the impact of QQE has begun waning once the index slows.
The rise in the core CPI, not to be confused with the core-core CPI, which excludes both food and energy prices, slowed year-on-year to 1 percent in September, without a direct effect from the April consumption tax hike. It may stand below that level in the coming months, which Kuroda earlier said would not happen.
Crude oil prices, which have fallen about 30 percent since July, will likely help push down inflation.
“We have to seriously consider the risk that inflation expectations will be depressed,” a senior BOJ official reckoned.
This also adds to the debate on when and whether the BOJ will ease further.
“It is expected the BOJ will again be forced into additional easing by next April,” Junichi Makino, chief economist at SMBC Nikko Securities Inc., said in a report.
Many analysts agree that falling oil prices are making the BOJ’s task harder. In an outlook report released last month, the BOJ expected core CPI to be 1.2 percent for fiscal 2014 ending March 31, and 1.7 percent for fiscal 2015. But they regard the estimates as optimistic. In fact, the BOJ itself has said it will be flexible about revising such projections and will not rule out additional easing.
“It is only that we will steadily proceed with our policy toward the 2 percent goal under the given political and economic environment,” another senior BOJ official said.
But the pursuit of higher inflation without sufficient commitment by the government to revitalize the economy will likely limit the potential for a truly sustainable recovery.
The tax hike delay can be seen as a lack of foresight, as spending and industrial output have taken longer than expected to rebound from the tax hike to 8 percent in April.
“Monetary policy can only buy some time,” former BOJ Gov. Masaaki Shirakawa said throughout his tenure through March 2013, implicitly demanding that Abe do his part to devise a strategy to improve growth via deregulation and structural reform.
Falling real wages despite the tax hike are another issue the government must handle with urgency. Abe on Wednesday asked business leaders to hold pay-scale hikes for the second straight year in the annual “shunto” wage talks next spring.
A senior official acknowledged the wage rise is essential to lift public inflation expectations and ensure the BOJ’s radical experiment succeeds.
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